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Macroeconomics 20.docx

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ECON 201

Macroeconomics Chapter 20  Recession: a period of declining real incomes and rising unemployment  Depression: a severe recession.  Economic fluctuations  Economic fluctuations are irregular and unpredictable  “business cycle” , but they do not come in regular intervals. Expansion is when business is going well and real GDP is rising  Most macroeconomic quantities fluctuate together  Real GDP is most common measure, but income, spending, and production all fluctuate together. Recessions are economy wide and effect everything  As output falls, unemployment rises  When companies produce fewer goods, they lay people off  Short Run Economic Fluctuations  Classical dichotomy: changes in the money supply effect nominal not real variables  If the quantity of money were to double everything would cost twice as much, but also have twice the income so it doesn’t matter (money veil) • Long run but not short run!  Model of aggregate demand and aggregate supply: the model that most economists use to explain short-run fluctuations in economic activity around its long-run trend.  Aggregate demand curve: a curve that shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level.  Aggregate supply curve: a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level.  Aggregate demand curve  Y = C + I + G + NX  All contribute to aggregate demand, government spending is constant  Price level and consumption: the wealth effect  Adecrease in the price level raises the real value of money and makes consumers wealthier, encouraging them to spend more. The increase in consumer spending means larger quantity demanded.  Price level and investment: interest-rate effect  Alower price level reduces the interest rate (because people need to hold less money and can put more in banks), encourages greater spending on investment goods (because interest rates are lower and they borrow more) and increase the quantity demanded.  Price level and net exports: the exchange-rate effect  Afall in the U.S price level causes U.S. interest rates to fall, the real value of the dollar declines in foreign exchange markets. This depreciation stimulates U.S. net exports and thereby increases the quantity of g&s demanded.  Shifts in theAggregate demand curve  Consumption  Change in how much people want to consume at any given price level • Want to save more, or spend more (taxes make spend less)  Investment  Changes how much firms want to invest (buy new computer systems-rise) • Investment tax credit- increase demand • Money supply increase, lower interest rates, borrowing less expensive, higher demand.  Government purchases  Buy more, shift right, vice versa
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